The incidence of the WCR on the Cash

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Starworld Group End of Year   2021 2022 2023 Accounts Receivable 232 278 362 Inventory 97 116 151 Prepaid expenses 35 20 55 Total 364 414 568 Accounts Payable 116 139 181 Accruals 36 45 55 Total 152 184 236 WCR 212 230 332 Annual requirement of funds   18 102

A positive WCR means a net requirement of funds.

WCR increases with the firm's sales (20 % in year 2017 and 30 % in year 2018) even if it has

more or less the same Inventory turnover, Collection period and Suppliers' credit terms.

Starworld Group 2021 2022 2023 Sales 2 784 3 341 4 343 Increase in sales - 20% 30% Cost of sales 696 835 1086

 

End of Year   2021 2022 2023 Inventory turnover in days 51 47 45 Collection period in days 30 28 27 Suppliers' credit terms in days 61 56 54

 

This example shows that even if the firm has a very high sales's growth, it can meet strong cash difficulties if it has not forcasted this new financing need : 18 in year 2019 and 102 in year 2020.

 

Sources :

Understanding Financial Statements, 1999, Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University.

Interpreting and using Financial Statements, 1999,Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University

(c) Corporate Finance Course, Bernard Jaquier, Professor in Economics & Finance, Lausanne, Switzerland, 2024